Tax Credits 101 CHPC. California Housing Partnership Corporation Zorica Stancevic Program Manager

Transcription

1 California Housing Partnership Corporation Zorica Stancevic Program Manager

2 CHPC Mission CHPC assists nonprofit and government housing agencies to create, acquire and preserve housing affordable to lower income households, while providing leadership on housing preservation policy and funding. CHPC Three Core Lines of Business: Financial Consulting for Affordable Housing Preservation Policy Training Resources

3 Agenda Tax Credit Basics What is a Credit? Eligibility and Affordability Calculating the Credit Types of Credits Ownership Structure & Responsibilities Obtaining an Allocation Planning for an Application The Basics

4 The Short Story Tax Reform Act of 1986 Included tax incentives for affordable housing Major incentive = LIHTC IRS apportions LIHTC s to state allocating agencies 2012: $2.20 per capita = $1.75 (2003) + annual inflation The Short Story (cont.) State allocating agencies adopt Qualified Allocation Plans (QAP) Guidelines for allocating credit TCAC is CA s allocating agency Developers apply to TCAC for credits TCAC monitors projects for 55 year compliance period (per IRC Sec. 42)

5 The Short Story (cont.) Developers market credits to investors Annual credits offset taxes otherwise owed each year for a 10 year period Cash paid for credits is equity to help build project Fills gap between TDC and other financing (e.g. bank loans, public agency loans, & grants) How it works (in brief) Section 42 of Internal Revenue Code (IRC) with major revisions through HR 3221 adopted into law July 08. LIHTC s = tax incentive (tax shelter) Provides credit against taxes due from owners of newly constructed or rehabilitated low income housing Must meet federal eligibility guidelines Most credits allocated in competitive process by each state

6 How it works (in brief) Amount of credits varies by project Depends on several factors, including: Construction and construction related costs a.k.a. Eligible Basis % of eligible units % of project used for affordable housing LIHTC equity investments can provide up to 70% of TDC ; may be less How it works (in brief) Projects owned by limited partnerships (in CA) Investor receives credits for 10 year tax credit delivery period Typically owns project for 15 year initial compliance period

7 How it Works (in brief) Two types of credits: 9% tax credit competitive 4% tax credit noncompetitive coupled with tax exempt bonds What is a Tax Credit?

8 Tax Credit vs. Tax Deduction Tax Credit = $1 for $1 reduction of taxes owed Examples include: Low Income Housing Tax Credit New Market Tax Credit Business Energy Tax Credit (photovoltaic technology) Earned Income Tax Credit Child Care Tax Credit Higher Education Tax Credit Tax Credit vs. Tax Deduction (cont.) Tax deduction = reduction in taxable income Examples for investment property include: Mortgage interest Real estate taxes Operating expenses Depreciation

9 Tax Credit vs. Tax Deduction (cont.) Eligibility and Affordability

10 Eligible Projects Per Sec. 42 (Federal), must meet basic criteria Non transient rental housing (includes SRO s) Residents income <= 60% of area median income New construction, substantial rehab, and/or acquisition/rehab (limited situations) For 9% credits, TCAC (State) specifies types of eligible projects Large family Senior Special needs Single room occupancy hotels (SRO s) At risk Ineligible Projects Owner occupied buildings Employer provided housing Nursing homes Retirement Homes Life care facilities Hospitals Dormitories Mobile Home Parks

11 Affordability Guidelines apply to incomes and rents Minimum Federal Guidelines 20% units at 50% AMI OR 40% units at 60% AMI TCAC (State) Guidelines 9% Credits Based on competitive scoring table For max points (most project types): Most units at 40%, 45%, & 50% AMI AND At least 10% units at 30% AMI Federal Affordability Term 15 year initial compliance period 30 year extended compliance period State of California 9% (competitive) credits: 55 years 4% (noncompetitive) credits: 30 years* *55 years if request higher basis limit

12 Gross Rent Limitation Rent 30% of income (per unit type) based on 1.5 persons per bedroom Gross rents include utility allowance Gross rents provided by TCAC Utility allowances: Housing Authority or CUAC method TCAC requires one recertification at first year anniversary No annual recertification for 100% low income projects thereafter Increases in Household Income Unit meets income target if tenant income increases up to 40% above ceiling > 40% increase, tenant no longer low income but can stay Unit still qualifies for LIHTC Next Available Unit rule (mixed income projects)

13 Calculating the Credit Basic Calculation Eligible Basis X High Cost Adjustment = Adjusted Eligible Basis X Applicable Fraction = Qualified Basis X Tax Credit Rate = Annual Tax Credit X 10 years = Total Tax Credits X Tax Credit Factor (price) = Investor Equity

14 Eligible Basis Cost of acquiring, rehabilitating, and constructing a building Excludes: Land acquisition & related costs, permanent financing costs, all reserves, syndication expenses, and marketing costs Consult an experienced professional Example Development Budget Land Acquisition $1,000,000 Hard Construction Costs 4,000,000 Soft Costs (architecture, etc) 1,000,000 Syndication costs & Reserves 400,000 Total Development Cost $6,400,000 Total Eligible Basis $5,000,000

15 High Cost Area Adjustment (130%) Can increase basis by 30% Applies to new construction or rehabilitation related basis only (not acquisition) Eligibility determined by location Federally designated Difficult to Develop Area (DDA) or Qualified Census Tract (QCT) Adjusted Eligible Basis Eligible basis after high cost area adjustment, if applicable

16 Example Eligible Basis $5,000,000 X High Cost Adjustment 130% = Adjusted Eligible Basis 6,500,000 X Applicable Fraction = Qualified Basis X Tax Credit Rate = Annual Tax Credit X 10 years = Total Tax Credits X Tax Credit Factor (price) = Investor Equity Applicable Fraction Lesser of: 1) Unit Fraction ratio of occupied low income units to all residential rental units OR 2) Floor Space Fraction ratio of occupied lowincome floor space to total residential rental floor space Excludes manager s unit (in both the numerator and denominator)

17 Qualified Basis Portion of building's eligible basis attributable to low income tenants Example Eligible Basis $5,000,000 X High Cost Adjustment 130% = Adjusted Eligible Basis 6,500,000 X Applicable Fraction 100% = Qualified Basis 6,500,000 X Tax Credit Rate = Annual Tax Credit X 10 years = Total Tax Credits X Tax Credit Factor (price) = Investor Equity

18 Tax Credit Rate Appropriate tax credit rate established monthly by the IRS Approximately 9% or 4%, depending on project specifics HR 3221 Exception: for 9% projects PIS prior to 12/31/13, use full 9% rate Annual Tax Credits 1 year s worth of credits

19 Example Eligible Basis $5,000,000 X High Cost Adjustment 130% = Adjusted Eligible Basis 6,500,000 X Applicable Fraction 100% = Qualified Basis 6,500,000 X Tax Credit Rate 9.00% = Annual Tax Credit 585,000 X 10 years = Total Tax Credits X Tax Credit Factor (price) = Investor Equity 10 Years of Tax Credits Multiply by 10 to reach total amount of tax credits

20 Example Eligible Basis $5,000,000 X High Cost Adjustment 130% = Adjusted Eligible Basis 6,500,000 X Applicable Fraction 100% = Qualified Basis 6,500,000 X Tax Credit Rate 9.00% = Annual Tax Credit 585,000 X 10 years 10 = Total Tax Credits 5,850,000 X Tax Credit Factor (price) = Investor Equity Tax Credit Factor Estimated price investor is willing to pay (expressed in cents/dollar)

21 Equity from Investor Product of 10 year credit and Tax Credit Factor Estimate amount of investor equity to the project Example Eligible Basis $5,000,000 X High Cost Adjustment 130% = Adjusted Eligible Basis 6,500,000 X Applicable Fraction 100% = Qualified Basis 6,500,000 X Tax Credit Rate 9.00% = Annual Tax Credit 585,000 X 10 years 10 = Total Tax Credits 5,850,000 X Tax Credit Factor (price) $1.02 = Investor Equity $5,967,000

22 Factors that Affect Amount of Tax Credits Amount of tax credit eligible basis Location in DDA/QCT (130% basis boost) California State Tax Credit eligibility % tax credit eligible units Factors that Affect Amount of Tax Credits (cont.) % of project used as affordable housing Actual tax credit rate Sources of funds (tainted money) Threshold basis limits

23 Threshold Basis Limits TCAC s method of cost control Starting in 2008, limits based on TCAC internal cost data Adjusted for geographic area & unit size Adjusted by type of credit Base limits for 4% credit projects higher than limits for 9% credit Threshold Basis Limits (cont.) Upward adjustments in certain cases: Prevailing Wage/Davis Bacon (20%) Parking constructed beneath building (7%) Child care facilities with programs (2%) 100% special needs units (2%) Elevator service to 95% of upper floor units (10%) Above increases limited to 39% total Energy / resource efficiency / air quality (up to 10%)

24 Threshold Basis Limits (cont.) Other upward adjustments Development Impact Fees Add amount of fees to basis limit Park, school, flood control fees, etc. Does not include permit & plan check fees Environmental mitigation & seismic upgrading: lesser of 15% OR actual cost Threshold Basis Limits (cont.) Boosts for 4%/Bond Projects w/55 year affordability 1% for each 1% of units targeted between 36% & 50% AMI 2% for each 1% of units targeted 35% AMI

25 Example Eligible Basis $5,000,000 Threshold Basis Limit $4,500,000 ** Lesser of Two Above $4,500,000 X High Cost Adjustment 130% = Adjusted Eligible Basis 5,850,000 X Applicable Fraction 100% = Qualified Basis 5,850,000 X Tax Credit Rate 9.00% = Annual Tax Credit 526,500 X 10 years 10 = Total Tax Credits 5,265,000 X Tax Credit Factor (price) $1.02 = Investor Equity $5,370,300 Types of Credits

26 Credit Rates (9% vs. 4%) 9% Tax Credit = 70% Present Value (of 10 yr stream of credits) 4% Tax Credit = 30% Present Value (of 10 yr stream of credits) Monthly Credit Rate Changes IRS publishes credit rates monthly Use 9% rate for projects PIS prior to 12/31/13 (only acq/rehabs) Formula based on AFR (derived from T Bills) Credit rate available online

27 Credit Rate: 12 Month History 9% credit 7.42% to 7.78% 4% credit 3.18% to 3.33% Rate set prior to OR at completion (PIS) If prior to Carryover Allocation (9% projects) Month of Bond Issuance (4% projects) 9% vs. 4% Credits 9% Competitive Compete through TCAC (highly competitive) Generates large amounts of credits & equity Reduced by certain federal grants State allocations based on per capita formula

28 9% vs. 4% Credits 4% Non Competitive Requires allocation of tax exempt bonds from CA Debt Limit Allocation Committee (CDLAC) Available from TCAC w/o competing (subject to meeting threshold requirements) No state volume cap on credits Generates lower credits & equity Not reduced by federal subsidies Credit Rates & Project Type New Construction Acquisition/Rehabilitatio n

29 New Construction Competitive 9% credit for constructionrelated costs If tax exempt bonds, non competitive 4% credit for construction related costs Acquisition/Rehabilitation Competitive credit: Competitive 9% credit (substantial rehabrelated costs) + Competitive 4% credit (building acquisition cost in certain cases) If tax exempt bonds: Non competitive 4% credit (substantial rehabrelated costs) + Non competitive 4% credit (building acquisition cost in certain cases)

30 10 Year Rule No 4% acq credits if ownership changed in past 10 years Includes sales and transfers of interest Exceptions for foreclosures, government purchases, or projects substantially financed by federal or state housing programs Consult tax attorney early (i.e., BEFORE acquiring building) Substantial Rehabilitation Federal Requirement Rehab related expenditures are GREATER OF: $6,000 per tax credit unit (to be adjusted for inflation annually after 2010); OR 20% of acquisition basis (i.e., cost of building + related costs excluding land) Note: TCAC and CDLAC impose additional rehab expenditure requirements

31 Credit Rates & Types of Project Funding Certain funds can trigger use of 4% credit rate: Tax exempt bonds Certain federal grants Credit Rates & Types of Project Funding (cont.) If using tainted Federal grants, depend on experienced professional to structure financing Otherwise, risk having 9% tax credit rate reduced to 4%

32 CA State Tax Credits California program augments Federal credits Cannot be used alone Orig. for projects ineligible for 130% boost Now available by request Eligibility (any of criteria below) Not located in DDA or QCT, or Applicant s election CA State Tax Credits (cont.) CA State credits available for Construction related eligible basis At risk only: Acquisition related eligible basis Most CA state credits used with 9% projects 15% of CA state credits can be used for 4% projects if certain TCAC criteria are met, but competitive Pricing Investor must have CA tax liability

33 CA State Tax Credits (cont.) Calculating 30% credit rate for construction basis 13% credit rate for acquisition basis (At Risk only) Delivered over 4 years First 3 years: credit rate for Federal credits Fourth year: 13% or 30% minus sum of credit rates from years 1 3 CA State Tax Credits (cont.) Example: Qualified Basis Amount 1,000,000 State Credit Rate x 30% Total State Credit 300,000 Qualified Basis Amount 1,000,000 Federal Credit Rate x 9% Annual Credit (Yrs 1 3) 90,000 For 3 years x 3 Total for first 3 years 270,000 Total State Credit (from Above) 300,000 Remaining Credit for year 4 30,000

34 Ownership Structure & Responsibilities Ownership Structure LIMITED PARTNERSHIP Owns project 2 partners at minimum: Managing General Partner Typically sponsor or affiliate Limited Partner Tax credit investor

35 Ownership Diagram Equity flows to project Tax Benefits flow to LP LIMITED PARTNERSHIP GP Non Profit or LLC LP Investor GP Typically holds.01% share of partnership Manages day to day operations (Managing Partner) Can be nonprofit corporation or nonprofit controlled Limited Liability Corporation LP Typically holds 99.99% share of partnership No direct management oversight (Passive Investor) Usually single corporate investor or multi investor equity fund

36 GP Unlimited liability (except non recourse debt) Often develops the project Receives fees for services (e.g., developer fee, partnership management fee) LP Liabilities limited to equity investment No role in development Syndicator will receive fees; net equity pay in takes these fees into account. May charge asset mgt fee GP May receive more than prorata share of cash flow, sales proceeds, and other benefits Provides guarantees LP Not usually motivated by cash flow or sales proceeds, only tax benefits Require guarantees

37 Who are Investors? Investors are corporations or pools of corporations Direct Investors Union Bank, US Bank, BofA, Wells Fargo Non profit Syndicators National Equity Fund, Enterprise Social Investment Corporation, Merritt Community Capital For profit Syndicators Alliant, Raymond James, Redstone, RBC, Hudson Housing Capital, Boston Financial, Centerline Investor Pricing Investor motivated by tax credits and tax losses (collectively, "tax benefits") Pricing based on investor's Internal Rate of Return (IRR), which takes into account timing of equity pay ins 15 year stream of tax benefits Note: tax benefits include credits and other tax losses from the real estate investment Pricing expressed as "Cents on the Dollar" of tax credits i.e., equity as % of total tax credits

38 Obtaining an Allocation Allocating Agency Allocations are obtained from the California Tax Credit Allocation Committee (CTCAC) Regulations and application forms available on TCAC s web site:

39 Three Ways to Get Credits 4% Credits (Non Competitive Allocations) For projects financed with tax exempt bonds 4% credit on acquisition and construction related basis Guaranteed allocation if requirements met 9% Credits (Competitive Allocations) 9% credit on construction basis with or without 4% credit on acquisition basis California Credit Limited amount of credit, must compete Ways to Get Credits (cont d) 4% Credits with State Credits (Competitive Allocations) For projects with tax exempt bonds 4% credit on acquisition and construction related basis State credit for construction related basis (acquisition related basis only if meets at risk definition) Submit application in same funding rounds as 9% application funding rounds

40 Threshold Requirements for all applications Housing need and demand Substantiated by market study, rents must be at least 10% below market Site control Local approvals and zoning Financial feasibility Sponsor characteristics Minimum construction standards TCAC Underwriting & Feasibility Criteria Developer fee limits Generally limited to lesser of Up to $2,000,000 (up to $1.4M allowed in basis) for competitive or $2,500,000 for noncompetitive Up to 15% construction basis + 5% acq. basis Construction contract limits General Conditions + Overhead & Profit cannot exceed 14% of construction cost (excluding insurance) Minimum operating expenses Matrix of housing type, location, elevator/nonelevator

41 TCAC Underwriting & Feasibility Criteria (cont.) Annual Replacement reserve $250 pupa New construction & senior projects $300 pupa Other projects Capitalized operating reserve 3 months debt service plus expenses Trending assumptions 2.5% income 3.5% expenses 2.0% property taxes TCAC Underwriting & Feasibility Criteria (cont.) Property Tax 1% of Replacement Value unless eligible for Welfare Exemption Vacancy Rates 5% Large Family, Senior, and At Risk 10% SROs and Special Needs Loan Terms Rate, term, DCR supported Minimum DCR = 1.15 (can be less if HUD, CalHFA, or RHS loan)

42 TCAC Underwriting & Feasibility Criteria (cont.) Variable interest rate permanent Loans Underwritten at ceiling Maximum cash flow after debt service For first 3 years, higher of 25% annual debt service 8% gross residential income Can be higher, if necessary to maintain feasibility for 15 years Residential vs. commercial income/expenses Each must be independent Additional Requirements for 4% Credit (non competitive) apps Minimum of 50% of basis plus land must be financed with tax exempt bonds (50% test) Must have received bond allocation from California Debt Limit Allocation Committee (CDLAC) For rehabs, must have minimum $10,000 hard cost per unit

43 9% Credits (Competitive Allocations) Additional threshold requirements The allocation system 2012 point system & tie breakers Fees and timeline Additional Threshold Requirements (9% Credits/competitive apps) Deferred payment financing, grants, subsidies must be committed Project size limits Rural 80 units Others 150 units Rehab no limit Waivers for Rural projects near urban centers, urban Hope VI & large neighborhood revitalization projects $20,000 minimum rehab cost $10,000 for at risk projects

44 Additional Threshold Requirements (cont.) Must be one of five housing types: Large Family at least 30% three bedroom or larger units SRO average targeted income 40% AMI or below, 90% of units cannot have separate bedrooms Special Needs average targeted income 40% AMI or below, at least 50% of units need to serve a special needs population Additional Threshold Requirements (cont.) Senior all units restricted to seniors (55+) At Risk existing federally subsidized project at risk of converting to market rate Housing types have additional requirements Required amenities Unit sizes Tenant services Leveraging

45 The Allocation System Housing type goals Large Family 65% SRO 15% At Risk 5% Special Needs 15% Senior 15% The Allocation System (cont.) Set Asides* Non Profit (priority to homeless) 10% Rural** 20% At Risk 5% Special Needs/SRO 4% Credit holdback 3% Total 42% * The Set Asides do not count against Geographic Apportionments **Rural may not compete in other Geographic Areas or Set Asides (unless applying in At Risk set aside)

46 The Allocation System (cont.) Geographic Apportionments (by County) Los Angeles County 33% Central Region 10% North & East Bay Region 10% San Diego County 10% Inland Empire Region 8% Orange County 8% South & West Bay Region 6% Capital & Northern Region 6% Central Coast Region 5% San Francisco County 4% 2012 Point System 1 a) Cost Efficiency CATEGORY POINTS NOTES 1 b) Credit Reduction 20 Combined, up to 20 points for 3 categories 1 c) Public Funds 2 Experience 9 GP - 6 pts, Mgmt. Co. - 3 pts. 3 Housing Needs 10 Must meet a housing type 4 a) Site Amenities pts. per site amenity 4 b) Service Amenities 10 5 pts. per service amenity 5 Sustainable Building Methods 10 LEED/Green Comm./Green Point 6 Lowest Income 52 10%@30% AMI to receive full pts. 7 Readiness to Proceed 20 8 Misc. Fed/State Policies pts. per item MAXIMUM TOTAL POINTS 148

47 Tie Breakers 1 st Housing type Next project with same score but unmet housing type 2 nd Sum of following two ratios: Committed Permanent Public Funds/TDC [One minus (Unadjusted Eligible Basis/TDC)] divided by three Highest ratio wins High Cost Projects High Cost if project s eligible basis exceeds adjusted Threshold Basis Limit by 30% Next steps High Cost projects not recommended for an allocation Sponsor may appeal to CTCAC at a public hearing with local funding representative Must justify reasons for high cost Explain why an allocation would be sound public policy

48 TCAC Fees for 9% Credits Application Fee $2,000 non refundable cashier s check OR $1,000 if Local Reviewing Agency waives its share Reservation Fees 4% of annual federal credit Performance Deposit (refundable/applied to monitoring fee) 4% of annual federal credit Allocation Fee Monitoring Fee $410/TCAC unit Monitoring Fee Allocation Timeline Assess tax credit feasibility/assemble experienced development team Obtain a reservation of tax credits in year 1 Pay TCAC app. fee & reservation fee Select investor & form final limited partnership Submit investor Letter of Interest (LOI) within 90 days if full Readiness to Proceed points received

49 Allocation Timeline (cont.) Close construction financing within 180 days if full Readiness to Proceed points received Carryover allocation: 10% test within 1 year of carryover Pay TCAC Allocation Fee Obtain C of O by the end of year 3 (2 nd year following year of reservation) Rent up project on schedule to meet commitment to investor 9% Tax Credit Timeline Application Preliminary Reservation Readiness Closing Deadline Placed in Service PIS app (8609 request)

50 Application Competitive application 2 rounds per year usually around March July Non competitive allocations must still submit application App s considered at monthly meetings CDLAC application must be submitted first or concurrent Preliminary Reservation Awarded 2 3 months after application Within 20 days of award, performance deposit (allocation fee for 4% applications) due If competitively awarded: 4% of annual federal credit reserved Bond projects: 1% of federal credit reserved Potentially refundable (allocation fee not refundable)

51 Carryover Allocation (9%/Competitive only) If not Placed In Service and 8609s not issued in same year as preliminary reservation, must receive carryover allocation N/A for 4%/bond projects Must meet 10% test Incur 10% of sum of land + total eligible basis anticipated upon completion Within 1 year of the carryover date, i.e., by October of year following preliminary reservation Placed in Service Occurs when placed in service i.e. suitable for occupancy If 9%, must meet PIS within 24 months of carryover New Construction PIS at C of O or temporary C of O Acquisition/Rehabilitation PIS more flexible can choose anytime after minimum rehab test is met

52 Placed in Service (cont.) IRS 8609 forms issued 8609 s allocate annual credits TCAC compliance monitoring fee due $410/low income unit Performance deposit refund applied to fee TCAC regulatory agreement executed and recorded Timeline and Fees: Differences for 4% (Non Competitive) Apps Allocations made monthly Reservation fee is 1% of annual credit, no performance deposit No carryover requirement No 180 day readiness requirement, but will have bond closing deadline, which is days from CDLAC award No placed in service deadline requirement, but must submit PIS package to TCAC within 1 year of the final building PIS date

53 Planning for a TCAC Application Planning Ahead for a Tax Credit Application Regulations Revised Usually towards end of the calendar year 2 application cycles Usually March and July

54 Planning Ahead for Application Requirements Minimum threshold requirements Site control Enforceable financing commitments Local approvals and zoning Sponsor characteristics Deferred payment financing, grants, subsidies Planning Ahead for Competitiveness Point categories that require advanced planning: Readiness to Proceed Sustainable Building Methods Site & Service Amenities

55 Readiness to Proceed Required at time of application: Enforceable commitments for all construction financing Site plan approval and necessary environmental review clearance to begin construction Public approvals (except building permit) Design review approval Must commence construction within 180 days of reservation Sustainable Building Methods Requires architect s involvement

56 Site & Service Amenities Service commitments require coordination with outside agencies Site amenities require collaboration with architect